Welcome to the third update in our series of guides to contract clauses.
After the delivery and performance obligations have been agreed upon (read our guide on these clauses here) the next topic to negotiate is ‘representations and warranties’.
Representations and warranties are important clauses for parties to review as they distinguish core obligations from those that are secondary to the main purpose of the contract. This affects not only the obligations of the parties but also their remedies. We have briefly described key considerations relating to representations and warranties below:
Warranty
A warranty is a contractual promise that a present fact or circumstance is true. Warranties may be incorporated expressly by the parties (e.g. by the contract saying that “Party A warrants that…”) but may also be implied, for example due to legislation or party conduct. For this reason, it is common for suppliers to include a term in the contract saying that any implied terms and warranties are excluded from the contract (to the extent it is legally permissible to do so).
As a warranty is secondary to the main purpose of the contract, i.e. it is not a primary undertaking or obligation, a breach of a warranty does not enable a party to terminate the contract, it only provides a claim for damages.
Examples of warranties include those regarding service and product quality, standards of performance, and delivery requirements.
Remedies. A breach of a warranty usually entitles a claim for damages. However, parties may contractually agree to a right to require repair, replacement or re-performance. In pro-supplier contracts is not uncommon to provide that the supplier may choose to perform one of the above remedies at its sole discretion. Conversely, a customer may want the freedom to choose which remedy is available, or to cancel the entire contract and receive a full refund.
What to do. As warranties are statements of fact, it is important to ensure that any warranties in the contract are true and achievable. For a supplier, it may be more beneficial to give certain promises as warranties rather than them being undertakings (i.e. “Party A shall…”). A customer will want to ensure that the warranties are strong and specific enough, with adequate remedies if they are breached.
Representations
A representation is a statement that is deemed to be made when entering a contract in order to induce (encourage) the other party to enter into the contract. Consequently, it provides for stronger remedies if breached, as the party is considered to have made a misrepresentation. The primary remedy is to set the contract aside, in its entirety, as discussed below. When negotiating representations within a contract, a party should aim to keep them as limited as possible due to the severe consequences of a breach.
Remedies. Misrepresentation provides for rescission of the contract (the right of the innocent party to set the contract aside) and potentially damages. Damages awarded for misrepresentation are unlike those awarded for a breach of warranty. In warranties, the damages are awarded from when the breach occurs, conversely damages for a representation are assessed at the date on which the representation was made, which is often the date of the contract (usually an earlier date). As a result, the damages are typically higher for a breach of a representation.
What to do. Be wary of warranties and representations being bundled together (i.e. “Party A warrants and represents that…”) as it is not always appropriate for both to apply. Representations should ideally be limited to those vital statements of fact that are true when the contract is signed and do actually induce a party to enter into the contract. If in doubt, avoid giving representations.
Get in touch with the team if we can help with your contract queries.